Lower Prices Loom Ahead

Warren Kester

Fri, 1998-05-01 12:00

Look for lower prices for feedlot replacement cattle the rest of this year, says Bill Helming. With cattle feeders already under pressure with losses of $50-200/head racking the industry, the Kansas City-based livestock economist believes that the 1997-1999 expectations of many producers and feeders about fed and replacement cattle market prices are inflated and un-realistic.There will be a new replacement

Look for lower prices for feedlot replacement cattle the rest of this year, says Bill Helming. With cattle feeders already under pressure with losses of $50-200/head racking the industry, the Kansas City-based livestock economist believes that the 1997-1999 expectations of many producers and feeders about fed and replacement cattle market prices are inflated and un-realistic.

There will be a new replacement cattle price plateau, but it will be lower, not higher, Helming says. He believes the odds are 90% that feeder, stocker and calf prices will decline $6-10/cwt. from today through the rest of this year.

Price spreads at $18.50/cwt. between Oklahoma 600- to 700-lb. steers and Texas Panhandle fed cattle the first three months of 1998 were the highest in six years. The narrowest spread came in 1996 at a -$3.65/cwt. when fed cattle prices were $64.73/cwt. at a time when corn prices were at record highs. This compares with $65.98 in 1997 and $62.53 the first three months of 1998.

A Significantly Narrower Spread That spread will narrow significantly the next six months, with most downward adjustment coming through October, 1998, Helming predicts. Of that spread, 80% will come from significantly lower feedlot replacement cattle prices, and 20% from moderately higher fed prices.

Breakeven prices on stocker/feeder cattle placed on feed now will likely range between $68-72/cwt. when sold as finished cattle in the Texas Panhandle this year, Helming suggests. The typical trading range on fed cattle will be $60-70/cwt. with the average close to $65, but at best within the $65-66 range, he believes. Prices should move slightly higher in 1999.

Helming warns, however, that should fed cattle market prices move above $70 in 1998, this level won't be sustainable, except for a short period of time, for these reasons:

* Large competing pork and poultry supplies. Meat supplies overall will be up 3.3% in 1998, including a 9% spurt in pork production. Total per capita meat supplies will be up 3.7% this year from 1997.

"That's in stark contrast to a year ago when per capita supplies were down 0.5 percent from 1997," Helming notes.

* A 6-8% decline in beef export sales this year and next will be a big change from recent years. It means more domestic consumption of beef, pork and poultry will be needed, Helming says.

* Domestic consumer demand and market share for beef continues to decline and now stands at an 18-year low. This is very serious and a real challenge for the beef industry, Helming contends.

Focus Needed On Domestic Demand The industry has tended to focus on meat supplies and/or competing meat supplies rather than domestic consumer demand for beef, he adds.

"It's human nature to not want to admit there's a beef quality issue and demand preference issue by the consumer," he says. "We want to be on the positive side, but the industry would be well served to be more realistic."

As shown in the charts at right, any time you have a product that consumers buy less of, even though the real inflation-adjusted price is less, it's obvious that demand for that product is poor and declining. It's a reality the beef industry must face, Helming notes.

To boost fed cattle prices above the $66-70/cwt. trading range, or even to average much above $65-66 this year, per capita beef supplies and competing meat supplies must drop substantially to offset this loss of market share, Helming says.

There are solutions to these concerns, Helming believes. He lists three points:

U Go to a true value-based beef production and market pricing system based on significant premiums and discounts, reflecting consumer eating satisfaction of beef. Kansas State University economist Ted Schroeder agrees (See article on page 36).

U Privatize the beef quality grading system to force packers, processors and others to put their name on beef through branded products.

U Implement a beef quality value and price discovery system based on the carcass cutout value of each fed steer and heifer slaughtered. All parties should have access to cutout data within 48 hours, or at least within 7 days from day of slaughter.

The Weather And Crop Factor Another factor with a bearing on the beef profit outlook this year is weather and corn crop projections. Helming forecasts a 9.8-billion-bushel corn crop under good growing conditions with cash prices in the $2-2.20/bushel range in the Cornbelt at harvest time. Adverse weather in July and August could push prices into the $3 range.

Helming believes chances are better for $2 than $3 corn, but advises a hand-to-mouth buying program until the grain outlook is known. A corn crop under 9 billion bushels could put added downward pressure on feedlot replacement cattle prices in late summer and fall, he warns.